Autumn Statement: Business boost to rescue economy

The Chancellor has put business at the heart of a last-ditch drive to rescue
the economy before the next general election, with £5.4bn set aside for
roads and schools, a surprise cut in corporation tax, a tenfold increase in
the capital investment allowance, and £1.5bn of support for exporters.

The Chancellor has handed business a £2.9bn two-year giveaway to try to rekindle growthPhoto: Getty

The centrepiece of his Autumn Statement was a £2.9bn corporate giveaway in 2013 and 2014 on top of the £5.4bn for building projects to help bring Britain’s moribund recovery back to life in time for an election battle.

Underlining the dire state of the economy, the Treasury’s independent forecaster – the Office for Budget Responsibility (OBR) – downgraded growth for every year to 2016 and ruled that the Chancellor will break his golden rule on the national debt, potentially putting the AAA sovereign credit rating at risk.

Fitch confirmed fears by saying on Monday night that “missing the target weakens the credibility of the UK’s fiscal framework, which is one of the factors supporting the rating”. A final decision will be taken next year. Despite the warning, the markets remained phlegmatic, with gilt yields falling on the back of the announcement.

The Chancellor also had to pencil in another £5bn of austerity measures to eliminate the structural deficit by 2018 – three years later than scheduled when the Coalition came to power in 2010. Almost £30bn of austerity measures are now unspecified as they fall after the current Parliament, posing another risk to the Chancellor’s credibility.

Seeking to address the concern, George Osborne pledged to set out the Coalition’s spending plans “during the first half of next year” in what observers said would amount to an election manifesto and potentially pitch the Tories against the Liberal Democrats.

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The Government desperately wants to harness the private sector’s £750bn cash pile to stimulate growth and yesterday threw everything at business in the hope it will finally start to invest. Mr Osborne effectively put the private sector on probation to deliver the recovery or face the prospect of a less pro-business Labour-led government from 2015.

Business groups welcomed the raft of measures but said the Chancellor’s words needed to be matched by delivery. “The Government now has everything to prove by delivering. Businesses need to see the Chancellor’s words translated into building sites on the ground,” CBI director general John Cridland said.

Weak growth tied the Chancellor’s hands, leaving him with no option but to reshuffle spending in the hunt for stimulus. In total, his giveaway for 2013, 2014 and 2015 amounted to roughly £900m a year – covered by an expected £3.5bn windfall from the 4G mobile phone spectrum auction in the coming months.

To pay for the £5.4bn of infrastructure spending in 2013 and 2014, government departments are being made to find another 3pc of savings over the next two years – largely through job cuts and pay freezes.

In an attempt to boost household spending next year, working families were handed a £1bn windfall by raising the tax-free personal allowance by an extra £235 to £9,440 – with higher rate taxpayers enjoying the full gain for the first time, albeit only for a year. The money will come from a reduction in the tax relief on pensions, raising £1bn annually by 2016.

Economists said the change would drive the money from investments into the pockets of people who would spend it on the high street – potentially helping to boost consumer spending and rekindle confidence. Likewise, the decision to cancel the 3pc rise in fuel duty will put £1.6bn back in consumers’ pockets next year. The funds were clawed back from working age benefits claimants, whose payments will rise by a below-inflation 1pc for up to three years.

Manufacturers were rewarded with a temporary, two-year increase in the capital investment allowance from £25,000 to £250,000 – to encourage them to start upgrading machinery now. The policy will help “99pc of all the business in Britain”, the Chancellor said, costing £910m in 2014.

The British Chambers of Commerce said businesses “will cheer” the announcement. It also welcomed the £1.5bn of export finance to help ensure deals overseas go through. Another cut in the rate of corporation tax to 21pc from 2014 will cost around £800m. It is down from 28pc in 2010. Some £500m annually from the bank levy and a £7bn crackdown on tax avoidance will help pay for the measures.

The OBR’s bleak forecasts may have hamstrung the Chancellor but they burnished its reputation for independence. It slashed its forecasts heavily, estimating the UK has shrunk by 0.1pc this year and will grow by just 1.2pc in 2013. In 2016, the economy will be 3.7pc smaller than predicted in the March Budget.

Weak growth put the Treasury’s golden rules for the public finances out of reach. To have met his debt rule, the Chancellor would have had to push through a further £17bn of austerity over the next three years – potentially sapping growth. Instead, he found £2.7bn to give away.

The OBR’s downcast outlook left the Chancellor with the prospect of having to borrow £53bn more over the next five years. Were it not for a raft of one-off effects, such as seizing the cash surplus from quantitative easing, borrowing would have been another £80bn higher.